HKEx to introduce flexible index options

HKEx to introduce flexible index options on 8 February

19/01/10

Hong Kong Exchanges and Clearing Limited (HKEx) plans to introduce Flexible Index Options (FIOs) on 8 February this year to expand the coverage of over-the-counter (OTC) contracts by its derivatives market's block trade facility (BTF).

FIOs comprise Hang Seng Index (HSI) and H-shares Index (HHI) options contracts with customised strike prices and expiry months which must be executed through the BTF.  Each series will be created by HKEx upon the request of an Exchange Participant.  The flexibility is offered under the following framework:

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Strike prices* can be any whole index points within +/-30 per cent from the opening price of the spot month futures contract on the day of request or the range of the prevailing highest and lowest strike prices available in the contract month requested and all other existing contract months with longer expiry terms, whichever range is the largest; and

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Expiry day is the second to last trading day of any calendar month and the expiry month* can be any calendar month, provided it is not further out than the most distant existing expiry month available for trading.

Last year, nearly 10 per cent of HKEx's derivatives market turnover came from block trades and block trading accounted for more than one-third of the HSI and HHI turnover (see table below).

Turnover in HKEx's Derivatives Market in 2009

All Futures and Options

HSI and HHI Options

Market Total
(contracts)

Block Trades
(contracts)

% of Total
Turnover

Market Total
(contracts)

Block Trades
(contracts)

% of Total
Turnover

98,538,258

9,406,723

9.6%

7,328,534

2,638,598

36.0%

With large deals in some OTC contracts with the same strike prices and expiry months as exchange-traded contracts already executed as block trades in HKEx's derivatives market, FIOs will expand that part of the market by allowing flexibility in strike prices and contract months.

HKEx believes FIOs will provide OTC market participants with an attractive counterparty risk alternative and contribute to the further success of its derivatives market.

"OTC players using exchange-traded futures contracts to hedge their option positions will be able to realise collateral and margining efficiencies when they book eligible option positions with us," said Calvin Tai, HKEx's Head of Derivatives Market.  "We think Flexible Index Options will help increase market transparency by attracting more OTC deals through our block trade facility."

Additional information on FIOs is available in the Product section (see Equity Index Options heading under Derivatives Market) of the HKEx website (www.hkex.com.hk).

* The chart in Appendix I shows how acceptable strike prices are determined and Appendix II provides examples of acceptable expiry months. Please click here to see Appendix I and II.